Will consumers understand the SEC’s disclosure documents?

FX Global Code: One Year Later

The Global Foreign Exchange Committee has an issued a report on the FX Global Code at its one-year mark. Also, here is the updated Code (taking into account changes to last look). I have previously noted, in an op-ed for Pensions & Investments, that “Investment managers that are fiduciaries to plans might want to embrace the code and advertise that fact to their plan clients. If there is skepticism of FX as a transparent market, an investment manager could seek to allay these concerns by explaining the code to its plan clients and how the code aims to make the operation of the market less opaque.”

States not backing away from fiduciary standard

William Galvin submitted a comment letter to the SEC criticizing proposed Regulation Best Interest and suggested that, absent the SEC’s withdrawal of the proposal, “Massachusetts is prepared to adopt a fiduciary standard for broker-dealers.” Meanwhile, the attorneys general of New York, California, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Mexico, Oregon, Pennsylvania, Rhode Island, Vermont, Washington and the District of Columbia submitted a comment letter calling for a uniform fiduciary standard and, inter alia, for Reg BI to “require the elimination of certain conflicted compensation incentives that cannot be sufficiently mitigated and to base any differential compensation to individuals on neutral factors.”

ESG Update for Asset Managers

I was particularly excited when I learned that Callan had published its 2018 ESG survey.  I encourage all ESG managers to review the survey in its entirety, not only to see the trajectory of adoption rates among retirement plans (governmental and ERISA), but trends of other important institutional investors, such as endowments and foundations. In terms of take-aways, incorporation of ESG factors increased by 95% since 2013 (22% then vs. 43% today) by respondents. This is great news, but ERISA plans (both DB and DC) lag other institutional investors in terms of growth rates and overall adoption. Interestingly, Callan found that DB plans were more than 3x more likely to incorporate ESG factors into investment decisions than DC plans. 13% of DC plans have an ESG fund in its lineup (we’ll have to wait until next year to see how the recent DOL guidance will affect this). Inflows into ESG options in DC plans continue to be less than desired.

The survey also found that one of the top ways institutional investors are implementing ESG is by conveying its importance to investment managers (though many fewer asset owners reported using actual metrics to score managers on using ESG). These showings are consistent with what I have been hearing, both from the asset owner and manager standpoint. A struggle to standardize a cross-manager analysis based on ESG metrics has proved challenging. I know that investment managers are fielding more and more questions on their ESG credentials.

There seems to be different reactions by institutional investors to the data that is coming out on the link between ESG and investment performance. The top reason cited by those who incorporated ESG was an expectation that it would improve their risk profile, followed by fiduciary responsibility. Yet, the principal reason why some institutional investors are holding back on ESG incorporation is the perceived paucity of data linking one or more ESG factors to investment performance. This also showed up in a recent NEPC survey.

I would urge fiduciaries to review the governing documents of the institutional investor regarding ESG and make sure that the implementation process squares with the stated objectives of the investor. This could be a higher risk when investors pursue E, S and G factors discretely.

PRI is probably happy to see more and more interest from managers and asset owners on becoming signatories. Managers should be mindful that PRI will want to see some concrete steps taken and not a “set-it-and-forget-it” approach.

The asset management community may wish to consider whether the DOL should be pressed to issue additional guidance in this area. The GAO has already indicated that the DOL is open to that possibility.